October 13, 2010

Messy paperwork marks rise, fall of mortgage mess

There's more than a little symmetry to the mortgage disaster. The steep upward slope of housing prices up to 2007 is now matched by a mirror, downhill line. And the irregular paperwork that characterized the issuance of subprime mortgages seems to be matched by new problems as homes are foreclosed upon.

Few want to admit it, but the housing bubble was inflated to a substantial degree by mortgage-applicant fraud. People lied about their incomes to get loans they couldn't afford. True, they often seem to have done this with the knowledge and perhaps encouragement of the mortgage originators. But I haven't heard of any home buyers who took out "liar loans" who have been prosecuted. The accepted idea seems to be that they were "victims" who shouldn't be held responsible for their misbehavior. There is also the issue of criminal-justice resources: Prosecuting all those people would overwhelm the system.

Just as selling all those houses took some corner-cutting, now repossessing them seems to be associated with irregularities, too. Bank of America has halted all foreclosures because of paperwork problems. The phenomenon of "robo-signing," in which people sign foreclosure documents without verifying their contents, seems to be widespread. The Washington Post reports that today attorneys general from several states including Maryland will announce an investigation into foreclosures.

Hard to tell what the effect of a foreclosure holdup will be on the national economy. The process was already taking years. A home in my neighborhood has been vacant since 2008 -- waiting, I assume, for the bank to repossess or for the bank's overwhelmed staff to put it on the market. Perhaps foreclosure problems will make banks like Bank of America more willing to grant relief to home owners -- cut their principal and set up a payment plan instead of kicking them out of the house.

Please address why case-managers from Dept of Social Service are allowed 72 hrs to return phone calls to customers,and after that time they don't return calls,especially since customers must edpend on that department for food benefits.

Why wait for good loans to go bad? Mortgage companies need a new plan to STREAMLINE MORTGAGE REFINANCES. Allow current, UNDERWATER mortgages to be quickly refinanced at current interest rates. Too many underwater homeowners are just giving the keys back to the banks on their bad investment. New loan rates and terms, with the current lender, would be a great incentive for homeowners to stay in their existing home.

In 2000, I bought a rowhouse in Hampden for well under $100k. I had to furnish the lender with two years worth of tax returns, IRA statements, bank statements and a number of other pieces of paper to prove my creditworthiness. Within 5 years, all that careful checking and corroboration had been abandoned in the real estate gold rush. That people thought home prices would go up forever is one of the great cautionary lessons of human economics. (See also, dot com boom of the mid to late 1990s.)

Paperwork problems? Really, Jay? Geez, you need to start reading Karl Denninger (www.market-ticker.org) since you apparently don't know about or don't care to tell your readers about the shredding of loan documents (and what the legal ramifications of tearing up a contract are), not recording the transfer of titles from the originating bank to the various entities to which they sold the mortgages (which means tax evasion since the transfer fees were not paid to the counties involved), the problems the REMICs have because they may or may not have legally owned the mortgages which they thought they bought, the riders that title insurance companies are now putting in their policies to protecty themselves, etc., etc.

Time2wakeup, the idea of refinancing/modifying the loans is a good one. Unfortunately, because the loans were sold to investors or other banks and the loan docs were not transferred and/or were destroyed, there is a lot of doubt about who actually owns the loan and thus could approve the modification. Just because a bank is "servicing" the loan (accepting payments, etc.) doesn't mean they own it. It's one tangled mess.

Jay, you've got to be kidding about prosecuting borrowers for these "liar" loans. There may be some tiny percentage that actually provided documents that they knew were fraudulent. Perhaps that tiny number should be prosecuted.

However, from what I've read, (since I haven't applied for a mortgage in nearly 20 years) the vast majority of these "liar loans" were encouraged, if not demanded, by the industry itself. They are the ones who should be charged with fraud and thrown into prison.

Let me just ask this: Do you really believe that a bank is going to loan hundreds of thousands of dollars to a borrower just because that borrower says "cross my heart and hope to die" that they have the necessary income to pay back the loan? No, the bankers were up to their ears in this, encouraged it at every opportunity, and should go to jail.

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About Jay Hancock

Jay Hancock has been a financial columnist for The Baltimore Sun since 2001. He has also been The Baltimore Sun's diplomatic correspondent in Washington and its chief economics writer. Before moving to Baltimore in 1994 he worked for The Virginian-Pilot of Norfolk and The Daily Press of Newport News.